As the leading jurisdiction for the domicile of captive insurance companies and, more recently, reinsurance companies (collectively, “insurance vehicles”), the laws of the Cayman Islands have a central role and require review. Careful when these insurance vehicles seek to approve and execute the various business arrangements they require.
A common transaction is the establishment of a credit facility or letter of credit agreement between the insurance vehicle and a financial institution or lender (based in the Cayman Islands or North America) (an ” financing ”). These financing arrangements help insurance vehicles in a variety of ways and address issues that might otherwise hurt their cross-border business models.
What transaction documents are standard?
The basic transaction document in a finance agreement is a credit agreement (agreed between the lender and the insurance vehicle) which will specify the additional documents that the lender will need and in particular the collateral that the lender will need to make financing agreement available. For the most part, the main transaction documents will be:
- The credit agreement;
- A charge on the insurance vehicle’s bank account in the Cayman Islands (or the United States if applicable); and
- Any application form required by the lender to apply for the financing agreement.
Occasionally, the lender will also require a guarantee on shares of subsidiaries of the insurance vehicle or guarantees from certain persons / entities to give more comfort to the lender in granting credit.
What else do lenders expect?
In addition to the execution of the above transaction documents, lenders will also expect a legal opinion to be issued by the Cayman Islands legal counsel to the insurance vehicle covering matters such as:
- The good training and good reputation of the insurance vehicle;
- The ability of the insurance vehicle to enter into the Financing Agreement; and
- The enforceability of the security granted under the transaction documents.
In addition, the insurance vehicle may also be required to demonstrate that it has applied for and received all required regulatory approvals from the Cayman Islands Monetary Authority before closing the financing transaction.
Common problems in the execution of transactions
Financing transactions involving Cayman Islands insurance vehicles have long been a feature of the market and are now standardized and uncontroversial to document and execute. However, two problems frequently arise:
- Timing – in cases where regulatory approval is required or changes to constitutional documents or an insurance vehicle’s business plan are required, the time required to seek and obtain the necessary regulatory approvals should be built into the process; and
- Company authorization – although board approval of an insurance vehicle is usually not an issue, the issue of calling and holding a meeting of such directors to formally approve the business. such arrangements (which is required by the lender and the legal advisor issuing the legal authorization) notice) can be time consuming and, due to various rules about where meetings can take place for regulatory reasons, scheduling. Solutions to this problem can of course be found, but it remains a common stumbling block in the conclusion of funding agreements.
We expect the financing arrangement market to continue to be buoyant over the next 12 months and, with the continued growth of the Cayman Islands reinsurance industry, we expect such transactions to become even more common. As noted above, finance agreements are generally not contentious to agree and close, but the perspective of transaction management to guide parties through the steps necessary to reach the finish line is vital for a successful outcome. efficient execution of these transactions. Conyers has a group of lawyers who are experienced in these areas and we are always ready to assist you when such transactions arise.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.